File this: income-tax time

Two Supreme Court decisions shift the benefit of the doubt to income taxpayers, especially high-net-worth individuals.

Chances are good that you, like many Canadians, are gathering together your receipts right now, preparing for the unpleasantness of having to file your income tax return. But before you roll up your sleeves, take heart: you may not have kept up with major changes to the tax landscape in 2005–and they could actually save you money.

In 1988, Parliament enacted section 245 of the Income Tax Act. Nicknamed GAAR, or the general anti-avoidance rule, the law was designed to counter the sort of aggressive tax-planning strategies that cost Ottawa millions. For nearly 20 years, GAAR was a powerful tool that the Canada Revenue Agency held over the heads of taxpayers looking for legal ways of moving money, according to Paul De Luca, a corporate lawyer with Torkin Manes Cohen Arbus LLP in Toronto.

But all that changed last year when two GAAR-related cases came to the Supreme Court of Canada's attention. On Oct. 19, the court made two unanimous decisions in Her Majesty the Queen v. Canada Trustco Mortgage Co. and Mathew v. Her Majesty the Queen. The taxpayer in Trustco tried to use a sale-leaseback scenario to take advantage of capital cost allowances. In Mathew, the taxpayers essentially purchased interests in mortgages with accrued losses to deduct them for tax purposes. The specifics of each case are largely immaterial to their impact on tax planning. Nor did the rulings change the wording of the Act. But they did clarify how to look at the rules.

The court essentially said that three things must happen before GAAR can apply: a tax benefit must result from the transaction; the transaction cannot be said to have been arranged for a purpose other than to obtain that benefit; and it must be an abuse of the Act. “This is a very big deal,” De Luca says. “It's one more weapon we have in our arsenal.”

That last criterion is the most important, De Luca notes, because it essentially shifts the benefit of the doubt to the taxpayer. “If what you're doing is allowed somewhere else in the Act, then it's arguably not abusive,” he explains. “So the burden is on the government to prove how it's an abuse of the Act. If they can't show abuse, the Court is more likely to uphold the transaction.”

That may not sound like much of an advantage, but it's huge news in tax circles. And to De Luca, the Supreme Court rulings are a welcome development–especially for high- net-worth people with unique deductions. As he puts it: “The harder it is for government, the better it is for the taxpayer.”